Monthly Archives: April 2015

So I managed to do a very good job of procrastinating on finishing my taxes this year and I only finished up during the weekend (but apparently due to an error by CRA you get until May 5 to get it in). But now it is all done I’m just waiting for my over sized tax refund which pushed past $6000, which is good because my wife owed over a $1000.

You might be wondering why on earth I got such a big refund when I tend to avoid such things? Simple a few minor shifts in the status quo of our taxes occurred:

The income splitting tax credit kicked in and we took full advantage of it.

I made a LOT of spousal RRSP contributions last year and now it is refund time.

My small business had a crappy year so I had very low profit to pay taxes on.

My wife on the other hand had a great year and so paid a bit more than usual.

Overall I tend to think all these minor tax credits and deductions are a bit of a pain in the butt. I would much prefer a stripped down tax system which I could file on a double sided piece of paper. Ironically, I found out I’m not alone in that thought according to a recent study. We haven’t had a major overhaul in the system since 1987 and with all these minor credits you have to determine which of the 120 of them apply to you. No wonder we buy software to do taxes now!

Ironically I think my procrastination had less to do with the taxes, but more to do with having to now deal with cleaning up all my files afterwards. I normally use the end of my taxes as my trigger to do the annual clean up. I just pull out old records and scan them where possible, shred old files that are no longer required and assess if I can make any improvements to my file system. It’s not particularly fun work so I, like most people, tend to avoid it.

How are you doing with your taxes? Are you planning to use the extra time or just get it over with?

With the cat finally out of the bag we now know a few details of the much rumoured expansion of the TFSA contribution limits from yesterday’s Federal budget (page 232 if you want to read the official text). First off it isn’t a actual doubling of the limit rather it is rising up from the current $5500 per person per year to $10,000. Still that is a huge increase in room, and it takes effect this year. The only downside of the announcement was the fact that they stripped out the inflation adjustment on the accounts contribution room. So enjoy that increase because we are likely not going to see another one for a VERY long time.

Of course a change in Federal government leadership might also trigger this to be a single year event with a roll back in the plan down the road. But for now it is going to happen this year, so let’s look at the potential implications for this in your retirement plan.

To say this is a game changer for some people is a bit of an understatement. A couple can now put away $20,000 per year in TFSA and never pay a dime of tax on growth in those accounts. So the holy grail of retirement planning just got a bit easier: the zero income tax retirement. I’m not sure if you realize this is about your life, but your single biggest bill is likely not your mortgage, but rather your tax bill. Your income tax portion of it can often be a big chunk of change so if you can reduce that in your retirement years you can often speed up your retirement date.

The trick has often been that while the TFSA’s are great ways to invest they don’t often have enough contribution room to make them your sole retirement investment account. For example, if you made $75,000/year as a family your RRSP limit is 18% of your previous year’s income or $13,500. So while the old TFSA limit was close at $11,000 for a couple, now it becomes possible to skip the RRSP entirely for most people and pour everything into a TFSA. (For those with math inclined minds, if your family makes $111,000 per year you can shelter the same amount in your TFSA as your RRSP now).

But what about the RRSP tax refund? Well while that is a nice thing to get you do still have to pay tax on your growth of your RRSP at the other end when you take the money out. While a TFSA you can shelter all the growth from getting taxed. So imagine you have saved well in your life and have a cool $1 million in retirement savings and a paid off house. Now imagine never having to pay a dime of tax on that and not having it reduce your Old Age Security benefits. Cool eh?

So to compare you take our $40,000 a year of income from that in an RRSP you would have to pay tax on that money. The final amount will vary by province but if only one of you take the money out you would lose anywhere from $5800 to $7700 in income tax for 2015. Leaving you with a net spending amount of $32,300 to $34,200. Or you could have put it all in a TFSA and got $40,000 to spend.

In our particular case this means I will likely skip putting money in taxable investing accounts and instead just shelter everything in RRSP and TFSA accounts. While I might need to keep some contributions aside for the last year or two I can then stuff it all in get caught up in no time (ie: likely two years after retirement).

All in all, there is a fair amount of potential in this announcement for your retirement plans. Of course, you should still do some numbers for your particular case to ensure it would be worth it to you. So are you making any changes your plan because of this change? Or you don’t think it will last?

Perhaps one of the more frustrating points of planning your early retirement is knowing at what point your target savings amount is enough without going so far over it you end up saving too much. After all missing the mark of enough is problematic on both sides: too little and you may need to go back to work or downgrade your lifestyle, while too much may result in you working years more than you needed. So how do you find that thin line of enough?

Unfortunately the answer is you really can’t know exactly if you hit enough in advance of retiring. It’s only after the fact does the answer become clear. It sucks, but sorry it is true. So what do you do about it?

In the end, you take your best educated guess and add just a bit beyond that to provide some degree of cushion and call it good. The problem is retirement planning tends to have people generate massively over conservative assumptions piled on top of each other landing a bunch of people firmly in the over saving category. For example, we assume high inflation and low market returns, we add in every possible spending item we can imagine for the next 30 years and we still can doubt if that is enough.

The real issue isn’t your planning process or your assumptions, but rather the fear that exists in your own mind. You see fear does funny things to people. We want to try and predict everything and control for it all, but in reality that is pointless. No one can predict the weather a week from now perfectly, so why on earth would you try to predict the stock market, government policy and inflation for the next 30 years or more…you can’t. Sostop trying.

Instead realize humans got to where we are not by being smarter than other life, but rather our ability to adapt to our surroundings. You need to embrace that in your retirement as well. Life doesn’t go according to plan during your working life and that won’t change in your retirement. So what happens know when things don’t work out….we adjust our plans and keep going.

So instead of beating your head against the wall in frustration, might I offer a reasonable idea of what enough could be. Get a sample of three to five years of your spending and then add in some obvious adjustments for your spending changes in retirement like if you both have cars, but plan to drop down to one car in retirement or perhaps downsize your house. After that add in 5% to the yearly spending and then make your plan on that. Why just 5%…its good to have a little cushion to allow you some additional flexibility…so rather than having to reduce spending somewhere else for a minor change to your plan you can absorb a bit of the little shocks with a small cushion in your spending. Alternatively, you could also just create a lump sum of cash (~2 years living expenses) as a your super-sized emergency fund to do the same thing, then when you end up with extra money you can just top up your fund during the good times.

The actual construct of what you decide shouldn’t matter as much as how does that make you feel. Does that ease the fear in your mind just a bit? If so, you likely have it right. You can’t make that fear go away…that take WAY more money than you can EVER save. Instead, ease the fear and then do some ‘what if’ games. What if the market drops by 5% the day after you leave work? What would you do? What if a major storm happens the same week your car dies? What would you do? The idea is to move the fear of the unknown into possible futures where you have some reasonable thought responses to likely events. The key is to keep things in the realm of reasonable. The odds of your spouse dying by a lighting strike, your car breaking down, your house burning down, your parents getting sick and losing your keys in the same day is so utter improbable that it isn’t worth planning for it.

In the end, accept the fear you can’t plan for it all, do add a small cushion to your plans and then jump off that cliff called early retirement. There is no way to learn it until you are doing it. Also keep in mind you might very well end up earning some money from a hobby or interest down the road, everything that happens to you wont’ be bad.

So what do you use as your cushion for your retirement plan? How do you know you have enough?

Disclaimer

I am not god. I am a mere mortal as such my reality is defined by my own views. So your reality might not resemble mine because of your views. As such all opinions, ideas and investments on this blog might not work for you as they did for me. Be a big person and do your own research and make up your own mind before trying something. The opinions expressed are my own. You might need to contact a local professional for advice.